Changes to the Luxembourg financial collateral arrangements law

On 7 July 2022, the Luxembourg Parliament adopted the draft law 7933 (the “Law”) amending, amongst other things, the law of 5 August 2005 on financial collateral arrangements, as amended (the “Law of 2005”), with the aim to include some clarifications and developments following its original creditor-friendly approach and adapting it to current market practice.

The Law entered into force on 24 July 2022 and can be found here.

The major amendments to the Law of 2005 are the following:

Freedom to agree the enforcement trigger

In order clarify and enhance the concept of freedom of contract regarding the triggering events for the enforcement of a security interest, the Law of 2005 has been amended adding the term “whatsoever” (“quelconque”) to the kind of events that could end up in an enforcement. This addition strengthens the fact that there is not a particular need of a non-payment scenario for triggering the enforcement of security interests.

How the proceeds must be applied in a non-payment default enforcement scenario

In connection with the amendment mentioned above, the Law has introduced a new provision clarifying that in the context of an enforcement of a security interest with no payment default or acceleration of the underlying secured obligations, the proceeds of the enforcement shall, unless otherwise agreed, be applied in discharge of the underlying secured obligations.

Modernisation of the enforcement process

In the context of enforcement by way of selling on a stock exchange (“par une vente en bourse”), it is now possible to sell the pledged assets on the trading platform (defined in the Law as “regulated markets, multilateral trading systems, and organized trading facility systems”) where they are admitted to trading. The outdated reference to the stock exchange has been removed.

Furthermore, in relation to the appropriation of the pledged assets, the Law has included clarifications in order to distinguish between:

1. the appropriation by a third party of financial instruments which can be made at market price unless otherwise agreed; and

2. the appropriation of units or shares of a collective investment undertaking, if they are admitted to trading on the trading platforms, which can be at market price or at the price of the last net asset value published by or for the collective investment undertaking, provided that the last publication of the net asset value is not older than a year.

The Law introduces an alternative enforcement method to appropriation or private sale, whereby a pledgee can redeem the pledged units or shares in a collective investment undertaking at redemption price in accordance with the constitutive documents of this undertaking. Under the previous version of the Law of 2005, the pledgee would need to find a third-party buyer.

Another amendment included in the Law is the change of the public auction (“vente publique”) procedure for the enforcement of pledges moving away from the previous public sale regime that was agreed upon and carried out by the Luxembourg Stock Exchange. As this method has become obsolete, after the entry into force of the Law, the public auction can be carried out by a notary or bailiff setting out the criteria of the public auction procedure including the designation of the auctioneer by the creditor, its role, the auction procedure, the designation of the pledged assets to be sold, the methods of publication and the deadlines. This update creates a more agile system.

Pledge over insurance claims

In relation to pledges over insurance claims deriving from insurance contracts, in an enforcement scenario the pledgee may exercise all rights resulting from the insurance contract in question, including the exercise of the repurchase right or demand payment from the insurance company for the amounts due.

Conclusion

Even if the Law does not include substantial amendments to the Law of 2005, it will help to modernise and align it with the market trends and to enhance the Luxembourg creditor-friendly approach. The Law also clarifies and confirms the global idea of contractual flexibility between the parties in terms of financial collateral arrangements.

The consolidated version of the Law of 2005 is expected to be available soon.